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The Federal Reserve (the US central bank) cut interest rates by a quarter of a percentage point, but indicated a slowdown in the pace of monetary easing next year, which pushed the dollar to rise to its highest level in two years and ignited intense selling in US stocks.
The Federal Open Market Committee voted on Wednesday to lower the index an average To 4.25 percent to 4.5 percent, which is the third consecutive reduction. Beth Hammack, president of the Federal Reserve Bank of Cleveland, cast a dissenting vote, preferring to keep interest rates steady.
Officials' forecasts for interest rates in 2025 also indicated smaller-than-expected cuts, highlighting policymakers' concern about persistent inflation. In a sign of those concerns, policymakers also raised their inflation forecasts for next year.
“This was an unashamedly hardline message from Federal Reserve Banksaid Aditya Bhave, chief U.S. economist at Bank of America, adding that officials' expectations of a quarter-percentage point cut in interest rates in 2025, instead of the three some economists had expected, represented a “total shift.”
JPMorgan Chase, one of the biggest players in US bond markets, noted that financial markets were now pointing to cuts of just 0.31 percentage points in 2025. The bank said that was “significantly more stringent” than its forecast of 0.75 percentage points, highlighting On the size of the discounts. Of transformation.
Wall Street stocks fell sharply after the decision, with the S&P 500 falling nearly 3 percent and the tech-heavy Nasdaq falling 3.6 percent. Many of the biggest winners pulled out in a strong stock rally in 2024: Elon Musk's automaker Tesla fell 8.3 percent, Meta, Facebook's parent company, fell 3.6 percent, and Amazon gave up 4.6 percent.
Small-cap stocks, which are particularly sensitive to fluctuations in the US economy, were hit hard, sending the Russell 2000 index down 4.4 percent.
US government bond prices also fell, with the yield on two-year Treasury notes, which are policy-sensitive, rising 0.11 percentage point to 4.35 percent. The dollar jumped 1.2 percent against a basket of six similar currencies to the highest level since November 2022.
The US currency has risen since Donald Trump's election victory last month amid expectations that tariffs will cause a new jolt to inflation, but the Fed's decision on Wednesday “puts more fuel on the fire,” said Mike Pugliese, chief economist at Wells Fargo.
After Wednesday's move, Fed Chairman Jay Powell said the central bank's policy settings were “substantially less restrictive” and policymakers could be “more cautious” when considering further easing. He said the December decision was a “closer decision” than in previous meetings.
Powell added that inflation is moving “sideways,” while risks to the labor market have “diminished.”
The Fed's goal is to put enough pressure on consumer demand and business activity to make payments Economic inflation And a return to the US central bank's 2 percent target without harming the labor market or the broader economy.
The core personal consumption expenditures price index, the Fed's preferred measure of inflation that excludes food and energy prices, rose at an annual rate of 2.8 percent in October.
Concerns about inflation holding above 2 percent have led Federal Reserve officials to expect cuts of half a percentage point in 2025, to 3.75 percent to 4 percent.
Powell also said officials have begun including assumptions about Trump's planned policies in their forecasts.
Four policymakers expected cuts of a quarter of a percentage point or no cuts at all next year. Fed officials had projected a full percentage point of interest rate cuts for 2025 in a previous “dot chart” released in September.
Wednesday's forecast showed that most officials expect the interest rate to fall to 3.25 percent to 3.5 percent by the end of 2026, also higher than their previous forecast.
They also raised their forecasts for core inflation to 2.5 percent and 2.2 percent in 2025 and 2026, respectively, and expected the unemployment rate to stabilize at 4.3 percent over the next three years.
the Federal Reserve Bank The Fed began its rate-cutting cycle in September with a large cut of half a percentage point, but concerns about the labor market have since subsided and the economic outlook has brightened. The economy's resilience in the face of rising borrowing costs has changed officials' calculations as they try to find a “neutral” interest rate that does not restrict growth or push it too high.
The central bank described the latest cuts as a “recalibration” of monetary policy that reflects its success in reducing inflation from its peak of around 7 percent in 2022.
Powell said on Wednesday that the Fed is in a “new phase of the process,” with borrowing costs approaching the neutral rate.
Fed officials raised that estimate for the neutral rate again, with the majority now setting it at 3 percent, compared to 2.5 percent a year ago.
The Fed meeting came just weeks before Trump returns to the White House, after pledging to raise tariffs, deport immigrants and cut taxes and regulations. Economists recently They were surveyed The Financial Times newspaper said that the policy mix could lead to a new wave of higher inflation and harm growth.
Additional reporting by Eva Xiao in New York
